To follow up on our earlier post on Basel II use tests – the BCBS  yesterday released a set of 4 principles in their latest newsletter, called “The IRB Use Test: Background and Implementation“.

To be honest, the principles are fairly generic and if you use tests are not complying with these principles already then calling them a use test is probably incorrect.

That said, the principles are:

  1. Banks are responsible for demonstrating their compliance with the use test.
  2. Internal use of IRB components should be sufficiently material to result in continuous pressure on the quality of IRB components.
  3. Demonstrating consistency and explaining differences between IRB components and internal measures can establish sufficient comfort that the first two principles are met.
  4. The importance of an internal process to the bank’s decision making influences the extent to which that process contributes to an assessment of use test compliance. Banks should take a holistic approach when assessing overall compliance of their institution with the use test requirements.

The real interest is, as usual, in the commentary below the principles – so, if this is an area you need to know, read the